Thursday 28 June 2012

A Fleet Of Fools

The latest ructions in the UK banking sector are causing a flurry of activity in the media and politics.  Barclays probably along with others have been up to no good.  RBS sacked lots of IT and back office people, outsourced to India and then rediscovered Murphy’s Law (see Wikipedia).

But in all the “Extraordinary Delusions And Madness of Crowds” (see Wikipedia re Charles Mackay’s book of 1841) a number of lessons have been ignored.  Under my nose at present is a book “The General Theory of Employment, Interest and Money” published in 1936 by John Maynard Keynes.

He was a man of formidable intellect and analytical powers.  It was Keynes who argued that the Classical Economics which ruled much of academic and political thinking on the subject no longer worked.  His exact words in the brief Chapter One were:

“Moreover, the characteristics of the special case assumed by the classical theory happen, not be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to he facts of experience.”

The world has turned upside down more than once since he wrote those words.  Had he been spared two decades longer we can only guess at what revisions he might have made to the structure of his theories and the application of monetary policies that he might have suggested.

In 1936 he wanted to show that employment substantially rested on what interest charges were made and what money flows there were.  Investment followed from these and this would generate the spending that enabled employment.

If the markets could not arrange this or were failing, then given uncertainty and the rest it was up to government to manage its own rates of interest and money flows in such a way as to influence both markets and real activity. 

The underlying assumption was that governments could and would do that if they were to overcome their attachment to classical economics and face down those in business or elsewhere.  This also had the assumption that governments did have this control within their own nations.

What has become clear to some, but not all and especially to those still wedded to the ideas of Keynes, is that this assumption of governments being able and willing to act effectively is no longer tenable.  In short what Keynes said of classical theory now applies to his own.

The reality has been that governments ceded control over the quantity of money and the direction of its flows to unregulated markets that went global beyond any real control.  Moreover, it is now clear that the big banks who managed to survive did so by taking control of effective interest rates.

“Investment” is now muddled up with “consumption” and often any spending that adds to money circulation is deemed to be invested.  In any case we are all too aware that the main feature of much government and connected “investment” is a dead loss and has no economic return.

It is often just a series of short term popular “quick fixes” or delusions to keep the media happy.  Consequently, the type and amount of employment that results does not meet either the numbers or the real economic needs required.

So what we have been taught in the last few days, if we did not already realise it is that there cannot any longer be any “general” theory or coherent explanation of what is happening. 

Least of all can governments make any effective decisions because they are prisoners of the global markets which are controlled by nobody except the madness of crowds.  The City of London has become the Bedlam of banking.

The picture above is “The Ship of Fools” (see Wikipedia), painted by Bosch in the last decade of the 15th Century.  It is an allegory now being quoted widely on the web.

1 comment:

  1. "So what we have been taught in the last few days, if we did not already realise it is that there cannot any longer be any “general” theory or coherent explanation of what is happening"

    I think that's exactly right. How does anyone build economic theories on a reality where much of what goes on is little more than fraud?